Issue and Redemption of Debentures: Complete Guide for Class 12 Accountancy

Understanding Debentures and Their Issue in Class 12 Accountancy

Debentures are long-term debt instruments issued by companies to raise funds from the public. Unlike shares, debenture holders are creditors, not owners. In Class 12 NCERT Accountancy, the Issue and Redemption of Debentures chapter explains the process of issuing debentures and the accounting treatment involved.

Companies can issue debentures in three ways:

• At Par: Issue price equals face value.
• At Premium: Issue price is more than face value.
• At Discount: Issue price is less than face value.

The issue price depends on market conditions and the company's creditworthiness. Understanding these helps students grasp the financial impact on the company’s accounts.

Accounting for Issue of Debentures at Par, Premium, and Discount

The accounting treatment varies based on how debentures are issued:

1. Issue at Par

When debentures are issued at face value, the entry is straightforward:

``markdown Bank A/c Dr. To Debentures A/c (Being money received on debentures issued at par) ``

2. Issue at Premium

If debentures are issued at a premium, the excess amount is credited to the Securities Premium Reserve Account:

``markdown Bank A/c Dr. To Debentures A/c (face value) To Securities Premium Reserve A/c (premium amount) (Being debentures issued at premium) ``

3. Issue at Discount

When issued at a discount, the discount is a capital loss and debited to Discount on Issue of Debentures Account:

``markdown Bank A/c Dr. Discount on Issue of Debentures A/c Dr. To Debentures A/c (Being debentures issued at discount) ``

The discount is written off over the life of the debentures through the Profit and Loss Account or Securities Premium Reserve if available.

Comparison Table:

This treatment ensures the company’s financial statements reflect the true cost of borrowing.

Receipt of Application and Allotment Money in Debenture Issue

When debentures are issued, companies usually receive money in stages:

• Application Money: Paid when applying for debentures.
• Allotment Money: Paid when debentures are allotted.

The accounting entries for these stages are:

1. Receipt of Application Money:

``markdown Bank A/c Dr. To Debenture Application A/c (Being application money received) ``

2. Transfer of Application Money to Debentures Account:

``markdown Debenture Application A/c Dr. To Debentures A/c (Being application money transferred to debentures account) ``

3. Allotment Money Due:

If debentures are issued at a discount, the discount is recorded here:

``markdown Debenture Allotment A/c Dr. Discount on Issue of Debentures A/c Dr. To Debentures A/c (Being allotment money due with discount on issue) ``

4. Receipt of Allotment Money:

``markdown Bank A/c Dr. To Debenture Allotment A/c (Being allotment money received) ``

This staged receipt ensures clarity in accounting and helps track payments received against debentures.

Redemption of Debentures: Methods and Accounting Entries

Redemption means repaying the debenture holders the principal amount after the maturity period. Companies can redeem debentures:

• At Par: Repayment equals face value.
• At Premium: Repayment is more than face value.
• By Conversion: Debentures converted into shares.

Accounting Entries for Redemption:

#### 1. Redemption at Par

``markdown Debentures A/c Dr. To Bank A/c (Being debentures redeemed at par) ``

#### 2. Redemption at Premium

The premium amount is debited to Loss on Issue of Debentures Account:

``markdown Debentures A/c Dr. Loss on Issue of Debentures A/c Dr. To Bank A/c (Being debentures redeemed at premium) ``

#### 3. Redemption by Conversion

Debentures are converted into equity shares:

``markdown Debentures A/c Dr. To Equity Share Capital A/c To Securities Premium Reserve A/c (if any) (Being debentures converted into shares) ``

Debenture Redemption Reserve (DRR)

Companies must create a DRR before redeeming debentures to protect creditors. It is created by transferring a portion of profits:

``markdown Profit and Loss A/c Dr. To Debenture Redemption Reserve A/c (Being DRR created) ``

This reserve is used only for redeeming debentures and is transferred to General Reserve after redemption.

Worked Example: Issue of Debentures at Discount and Redemption at Premium

Let’s consider a company issuing 10,000 debentures of ₹100 each at a discount of 5% and redeeming them at a premium of 10%.

Step 1: Issue of Debentures at Discount

• Face value per debenture = ₹100
• Discount = 5% of ₹100 = ₹5
• Issue price = ₹95

Journal Entry:

``markdown Bank A/c Dr. (10,000 × ₹95) ₹9,50,000 Discount on Issue of Debentures A/c Dr. ₹50,000 To Debentures A/c ₹10,00,000 (Being debentures issued at 5% discount) ``

Step 2: Redemption at Premium

• Premium = 10% of ₹100 = ₹10
• Amount payable per debenture = ₹110

Journal Entry:

``markdown Debentures A/c Dr. ₹10,00,000 Loss on Issue of Debentures A/c Dr. ₹1,00,000 To Bank A/c ₹11,00,000 (Being debentures redeemed at 10% premium) ``

This example clarifies the accounting treatment for both discount on issue and premium on redemption.

Important Formulas and Tips for Class 12 Students

Here are some key formulas and tips to remember for the Issue and Redemption of Debentures chapter:

• Interest on Debentures = Face Value × Rate of Interest × Time

• Premium on Issue = Issue Price - Face Value

• Discount on Issue = Face Value - Issue Price

• Redemption Amount = Face Value + Premium on Redemption (if any)

Tips:

• Always distinguish between issue price and face value.
• Record discount as a capital loss and write it off over the debenture’s life.
• Create Debenture Redemption Reserve before redemption.
• Use clear journal entries for application, allotment, and redemption stages.

Mastering these concepts will help you score well in your Class 12 NCERT Accountancy exams.